Cryptocurrency decentralization explained - what are the pros and cons

Bitsgap

·

2018-12-20

In this article, we’ll be talking about crypto decentralization. It’s the basis of the blockchain and the many cryptocurrencies which benefit from it, but what is it? What are the benefits and how does it apply to the crypto space? Keep reading to find out!

Decentralization meaning in the crypto sphere

One of the biggest draws of cryptocurrency and even the blockchain, in general, is its leaning towards decentralization. While it can be applied to many different things, the main idea involving all decentralized systems is that they can’t be controlled by any one authority.

This makes them more democratic in nature, and it means that you don’t need to worry about one entity being able to make off with your funds or that the system will be shut down by outside interference.

What cryptocurrency services can be decentralized?

Pretty much any services that run on the blockchain can be decentralized. This includes currencies, data storage, hosting and more. Since the activities surrounding these processes are distributed, it makes it near impossible for them to be shut down or controlled by an outside authority. This will only become more and more important as time goes on.

What is decentralized cryptocurrency?

A decentralized cryptocurrency follows the same rules that we’ve talked about already. It resists the control of central authority. That means that if you’re holding a currency like Bitcoin or Monero in a private wallet it can’t be taken or seized by an outside authority, or even the developers of those currencies themselves. You can store your funds knowing that they are safe as long as you protect your private keys.

How decentralized Bitcoin is?

Unfortunately, as the cost of mining Bitcoin has continued to rise, the system is becoming more centralized. Originally, anyone could mine Bitcoin with their home computer, and this made the distribution of the network much larger.

Now, there are some serious concerns that it is becoming too centralized, but there are still a number of parties actively mining which keeps things in check. Will this be a problem in the future? Only time will tell, but even if it is, the beauty of cryptocurrencies is in their ability to evolve.

Are all altcoins decentralized?

No. Cryptocurrencies are allowed to be whatever they want, and some altcoins do exist in closed systems. This means that the issuer of the altcoin could potentially have great control over the asset in question.

In some cases, such as intricate financial services this may be a requirement, and it’s not always a horrible thing. However, if decentralization is important to you, then you’ll need to audit the altcoin in question to make sure it’s really what you think it is.

What are decentralized exchanges?

When trading cryptocurrencies you need an exchange, but many exchanges are actually centralized and run by a corporation. This goes against the main ethos of cryptocurrencies, and so decentralized exchanges were born.

These exchanges feature a trading platform that functions like a peer to peer network, and they offer services over a distributed network. The result is an exchange where users can trade their crypto coins without the worry of overreaching government agencies or untrustworthy centralized exchange partners stealing their coins.

How do decentralized wallets work?

If you want the full benefits of cryptocurrencies it’s important to store your coins in decentralized wallets. These are wallets that make you the sole custodian of your investments. That means that you control the private keys rather than some other entity (such as an exchange).

While it can be convenient for a third party to hold your funds since they typically offer protections or other benefits, there are also negatives. If the service becomes insolvent or turns out to not be trustworthy, then your funds will be gone forever, and you’ll have no way to recover them.

Who benefits from decentralized crypto services?

Decentralized services can benefit many individuals. This includes retail consumers who can have access to things like payment services with little to no fees. However, decentralized crypto services can also be great for businesses, particularly those who are in legal but frowned upon industries such as cannabis where working with payment providers and even service providers can be very difficult due to legal issues. Users can’t be banned from or discriminated against when using decentralized crypto services.

Can decentralization exist without blockchain?

The blockchain is trustless, so it would be difficult to have a truly trustless system without the blockchain. All other solutions require the management and approval of a trusted party, and this inherently would make them centralized.

Advantages of decentralized crypto coins and services

There are many advantages to decentralized crypto services, including the fact that funds or information can’t be seized by authority figures. Blockchain systems manage themselves, and they are trustless.

This allows parties to transact without worrying whether they can trust the other party to make good on the deal. The blockchain handles the trust factor without any third party to make sure things are going smoothly.

Disadvantages of cryptocurrency decentralization

One of the most apparent disadvantages of a decentralized system is crime. Nobody can be banned from using cryptocurrencies or decentralized blockchain systems, and that means that there will be criminals trying to take advantage of people and the system itself whenever they can. Combating these issues is near impossible if you want to have true decentralization.

There’s also some problems for users who aren’t tech savvy or even for those who have made an honest mistake. In a decentralized system, you can’t just call up your service provider to be let back into your account. If you lose your wallet information then you’re out of luck.

Decentralized versus centralized

Decentralized systems can function without a third party to manage them. A centralized system is controlled by a central authority such as an exchange owner.

Centralized systems are also in danger of being shut down by governments if they don’t play by the rules, but that’s much harder to do in a decentralized environment.